“Without continual growth, such words as improvement, achievement, and success have no meaning” – Benjamin Franklin.
This quote from Benjamin Franklin dictates a lot of instances from the life of an investor. Where success can only be measured in terms of growth. If a person invests in a certain fund and just expects quick returns to spend on shoes and food, that person will never be what you certainly picture when you think about an investor.
In Singapore, where a prominent part of the population is interested in the market, Real Estate Investment Trust (REITs) have been a beloved investment choice for a lot of money makers. And with the priority given to real estate investment in Singaporean families, REITs have consistently won the public’s trust with its dividend distribution system.
A lot of young and old people invest in REITs in hopes of getting good results, but as Warren Buffet said – “Risk comes from not knowing what you’re doing.” Losing money is never a pretty thing for any investor and complete knowledge of the market that you’re delving into is important to root out a map for your journey to success in investment.
What to Expect From REITs
If you’re a newcomer in the REIT sector, don’t worry, as it is nothing much differentiated from the stock market shares. The major difference that separates the two is the commodity you invest in. When you invest in shares, you put your money on the stock of the company and only expect returns when the company performs. But it is not the case in REITs as they do not operate on their own performance. They utilize the money invested to purchase tangible assets like real estate properties.
Since the REITs invest your money into the development, maintenance, and management of real estate assets, they lease out the properties and distribute a large part of their taxable income to investors as dividends. So when you’re investing in a REIT, there is generally a low-risk factor, given you’ve already done a thorough research of the market conditions for the past and upcoming years. REITs provide a minimum of 5-8% of dividend which is distributed quarterly or every six months. Investors can also sell their shares if the prices go up steeply, and earn heavy profits on returns.
How to Evaluate an asset in REITs
The general price-to-earnings ratio evaluation method of the share market won’t help you in evaluating REITs as they have a distorted record of income because of the revaluation of its investment properties. But REITs have other methods for evaluation such as:
The dividend or distribution yield of a REIT is the return on investment (ROI) paid on the price of one of its units. The higher the distribution yield of a REIT unit is, the more dividends you get on the REIT. Buy a number of units and watch them grow. The dividend is an important factor even in the share market and keeps fluctuating, but dividends in REITs are much more secure. This is because of the 90% distribution rule, which means any REIT will have to distribute 90% of its income among its investors as dividends in order to enjoy tax benefits.
The ROI of a property is the capital rate or cap rate of a REIT. A cap rate is determined by dividing the net property income from the original value of the property in view. Cap rates are also measurable on a portfolio level. To make sure that your comparisons do not fool you, you must always compare cap rates among the same kind of REIT trusts. For example, if you’re calculating cap rate for a REIT specializing in hospitality, your next REIT must also be a hospitality trust. This will help you get the best out of each portfolio.
How to Find the Best REIT
REITs have been in the priority list of many investors due to its incomparably high and consistent distribution yield. But out of all the REITs out there, you’d like to choose the one that provides you with a considerable ROI and high yield possibilities along the path.
Just like an individual needs a credit score to be evaluated by the banks and credit card companies, a REIT’s competence is measured by analyzing how it handles its credit. There are various sources of borrowing for a REIT like banks, bonds, fundraising, and offshore sources. If a REIT utilizes various sectors for borrowing, it means that its capacity of managing debts is good. A number of creditors indicate that the trust has a reputation and financial prowess to repay its creditors.
Debt Maturity Profile
Debt maturity profile is the date when the debt comes due. A REIT’s debt maturity profile can be found on the presentations every quarter or the annual report. The due date for a debt repayment means that there will be more interest in the firm’s debt, which can affect your dividend yield. If you see a proper repayment of the REIT’s debts in its past, it shows that the trust has good financial management and will ensure dividend growth.
REITs generally don’t demand a big risk appetite from an investor due to its nature of the business. But when investing in REIT there is always the risk of the price drop of the assets. A rough premonition about the REITs future growth can be made by analyzing its debts, dividends and cap rates. Always clear out any underlying doubt before you confirm your investment on a portfolio.
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